Kellogg
experts reveal the (triple) bottom line on corporate social
responsibility, and its strategic role for today's businesses

By
Matt Golosinski

"[T]here
is one and only one social responsibility of business —
to use its resources and engage in activities designed to increase
its profits so long as it stays within the rules of the game...."

—Milton
Friedman, New York Times Magazine, Sept. 13, 1970

Apologies
to unwavering free marketers, but corporate social responsibility
is hot.

Some mutual
funds screen for it, while various indexes and rankings establish
criteria related to CSR. The Global 100, for example, tracks
performance of what it calls the "most sustainable corporations
in the world. "The Kellogg School, meanwhile, has established
courses to teach leaders how to excel in the hypercompetitive
world of market and nonmarket forces, and offers frameworks
to manage a host of issues around practices that aim to "do
well and do good."

That
business should care about a diverse set of community stakeholders
in addition to its shareholders' profits is an appealing notion,one
whose merits seem unassailable, even if the supporting details
can be vague. What, after all, does it mean to be "environmentally
sustainable?" How does the definition change if you're an
oil company?

It's easy to get swept up by the allure of CSR,
an idea that elevates business to heroic problem-solver, tackling
challenges — from poverty to pollution —that formerly
were the domain of government to redress. This concept isn't
entirely new: A century ago business leaders were just as
eager to be pillars of the community. The Protestant Christian
"Social Gospel" and the political Progressive movements influenced
executives and educators, including those at Northwestern
University's School of Commerce, a predecessor to the Kellogg
School.

Economist
Earl Dean Howard was one of the scholars who took his insights
into the community, successfully bringing labor and management
together at Chicago clothier Hart, Schaffner & Marx, saying
in 1928 that each party could "afford to make very great efforts
to preserve industrial peace; on both sides there is much
to lose and little to gain by warfare."

More
broadly promoting the social obligations of business was Charles
Cason, vice president of Chemical National Bank. "We know
that real success in business is not attained at the expense
of others," he said in 1927.The best executives "would not
consider a policy which enriched them and their company and
was at the same time against the public interest."

Scratch beneath
the surface, though, and CSR becomes more complex, which is
why Kellogg offers a curriculum — Social
EnterprisE at Kellogg, or SEEK — to teach students
how to navigate the rapids of consumer activism and regulatory
pressure. Doing so includes strategically deploying philanthropy
or adopting sustainable practices that signal one's standing
as a good corporate citizen. Years ago, this approach seemed
easier to dismiss, and some influential thinkers did just
that.

By 1970, free
market advocate Milton Friedman complained of the intellectual
looseness of CSR. Only people could be "responsible," he contended,not
companies. Business leaders who spent resources (i.e. the
owners' money) to promote unclear "social" objectives in addition
to advancing the firm's profits were imposing a kind of tax
on shareholders and "preaching pure and unadulterated socialism,"
in Friedman's view. It was enough for the Nobel Laureate that
business provided jobs and products that supported social
and political freedom. Anything more amounted to ill-advised
meddling, or worse: an attack on individual liberty.

What a difference
four decades makes.

Like
it or not, the competitive landscape has shifted dramatically
today, requiring most leaders to harness the power of any
and all tools, including CSR.

Post-materialist
consumers

It's
this strategic utility of CSR that Daniel
Diermeier, the IBM Professor of Regulation and Competitive
Practice, researches and teaches. He says nonmarket forces,
including regulation and consumer boycotts, can significantly
shape a firm's success, which is why he and other Kellogg
colleagues like Adam
Galinsky, the Morris and Alice Kaplan Professor of Ethics
and Decision in Management, and Klaus
Weber, assistant professor of management and organizations,
are preparing students to manage effectively in this complex
environment.

Diermeier
says that information technology, the global supply chain
and a shift in values among many "post-materialist" consumers
(those affluent enough to enjoy the luxury of fulfilling needs
beyond mere necessity) are forcing firms to pay more attention
to how they conduct their business at all levels of their
value chain — from the suppliers with whom they work
to how they treat their employees to their corporate presence
in the community.

Just
ask Wal-Mart, Diermeier says. Its stock price fell some 27
percent as a result of recent sustained nonmarket activism,
much of which was disseminated via the Internet and in response
to the company's labor and management practices. Its sales
growth also has slowed to an average of 3.5percent and its
proposed new urban stores have run up against community resistance.
The retail giant even went from being lauded as one of America's
most admired companies in Fortune magazine to the subject of a scathing documentary,
"Wal-Mart: The High Cost of Low Price."

It becomes
much more important for businesses to do things the right
way as the Internet makes companies ever more transparent
to consumers who care about social responsibility and sustainability,
says Diermeier, also director of the Ford
Motor Company Center for Global Citizenship at Kellogg.
One bad supplier, poorly managed retail store or unhappy customer
on video can spell years of disaster for a company the instant
the news hits the Internet.

"Once it's
on YouTube, it lives forever," he adds, citing the power of
communications technology to move markets. As an example,
he notes the pressure that the Rainforest Action Network put
on Citigroup in 2004 to adopt a comprehensive environmental
policy on logging. "Twelve people exploited the flattened,
integrated economy to force change," says the Kellogg professor,
pointing out that these efforts, instead of going after the
main company, can target critical links in that firm's value
chain that may be vulnerable,ultimately producing the desired
change at the top of the chain. "As a manager,you've got to
deal with this, even if you think the claims behind the attack
are wrong."

But
under the best circumstances, customers still are demanding
more from businesses. "They want more than a car, they want
a Prius,something that signals, 'I care about the environment!'"
says Diermeier. As a result, for these consumers a firm's
environmental or labor practices can matter as much as its
products. For the company, he adds, this shift in values offers
an opportunity to "market to the moral self."

Whether
corporate social responsibility as a competitive or a nonmarket
strategy can increase the bottom line depends. The majority
of recent studies indicate that CSR has a positive impact
on the company's financial performance, although these studies
mostly pertain to environmental issues.

Diermeier
notes that the payoff will vary based on industry, company
and product line, with "lifestyle" brands (think Starbucks)
and well-known consumer brands enjoying the most potential
benefit. Not all firms may find it worthwhile to sink resources
into CSR, but clearly some cannot afford not
to do so. Equating corporate social responsibility to a level
of product quality, Diermeier uses an analogy to explain how
for a hotel chain the investment can be essential, optional
or just minimal depending on the market space. A premium brand
like the Four Seasons will approach value investment rather
differently than a more standard brand like Holiday Inn. But
for businesses in the accounting or healthcare space, it may
be impossible to skimp on superior value.

"There
is no market for a low-quality auditor. There is no market
for a low-quality heart pump that works some of the time,"
Diermeier says.

It takes
a mindset

Understanding
the strategic value of CSR is one thing; executing along that
dimension is another. Weber says it takes resources, leadership
and commitment to bring it off, and not every organization
can handle the challenge. It also takes the ability to innovate,
a significant prerequisite and one that Weber says is too
often ignored in discussions of responsible business practice.

"If
consumers are clamoring for greener products, can you come
up with something that squares the circle? Can you offer something
before they start clamoring and then fix consumer and competitor
minds on that [option] as the way to go?" he asks.

Even if the
company's senior leaders embrace CSR, "you need to put it
into the firm's DNA, and that is really tough," he adds. As
an example, he points to corporate "greening" efforts like
carbon trading — a relatively straightforward transaction
that doesn't alter the organization fundamentally —
and other, more pervasive environmental efforts that demand
a comprehensive approach. "Once you want everyone inside the
firm to think that way and come up with innovative ideas about
how to make every process, every product more sustainable,
that's really difficult," Weber says. "It takes both a formal
organizational commitment and an informal commitment among
the workers. It's more difficult to do the informal; you need
people with the right mindset."

Often,
he points out, it's not that people don't want to pursue"good"
outcomes. Rather, "there isn't anything 'more good' to choose
from and so they keep doing things the way they are used to."
The bottleneck, he believes, has more to do with a company's
ability and agility than with its motivation.

When
the right resources are in place, though, CSR can deliver
results for the company's balance sheet, for its employees
(particularly those who themselves are driven more by "post-materialistic"
ideals) and for the community. Doing good can also be a potent
recruiting tool, says Galinsky, whose research includes investigations
into power dynamics, motivation and negotiations.

"From an evolutionary/cognitive perspective, we
are 'inspirational-ready' individuals," he says. "CSR comes
into play in this regard because as a company you can tap
into the idea that people are making a difference and having
a meaningful impact. Many people are willing to take less
money to be part of an organization that they feel has more
meaning and that lets them feel they are making a more significant
contribution."

Curiously enough, though, sometimes even the people
at the top who espouse the value of doing well and good can
fall victim to their own worst impulses, Galinsky says. That's
because power tends to transform people's psychological states.
As people gain positions of authority, they may show characteristics
that appear inconsistent or incompatible with the tenets of
responsible business practice. Galinsky cites the example
of Paul Wolfowitz, former World Bank president,whose public
expressions against corruption didn't match his private behavior
in promoting a colleague with whom he was having a romantic
relationship. The recent case of Eliot Spitzer, former New
York attorney general and governor who resigned after a sex
scandal, offers another textbook case of how power affects
values and judgment. The example of Whole Foods CEO John Mackey,
a vocal advocate for corporate social responsibility, is also
illustrative, Galinsky says. Mackey was revealed in 2007 to
have been posting messages to a Yahoo stock market forum under
an alias for several years. The messages, according to The New York Times, "championed his company's stock and occasionally
blasted a rival, Wild Oats Markets," which Mackey was maneuvering
to acquire — apparently hoping his anonymous postings
might decrease the potential acquisition's share price, making
it cheaper for Whole Foods to buy.

"Mackey was
caught engaging in what a number of us would consider unethical
behavior," Galinsky says. "And, in his case, very hypocritical
behavior — he has long advocated an alternative view
to Friedman's— a stakeholder theory of the firm that
takes into account societal and employee impact of corporate
policies."

More generally,
he adds, the threat of hypocrisy with respect to CSR initiatives
is a "huge danger."

"Hypocrisy affects people very, very deeply on a
psychological level," Galinsky says. "If you're going to go
down that road and present yourself as a socially responsible
company, you have to commit to that road, because as soon
as you get caught behaving in ways that are inconsistent to
what you professed, there will be a cascade of negative reaction
more extreme than if you just engaged in that behavior without
sounding hypocritical."

The
backlash could even occur if a firm's scales back its CSR
efforts because of economic necessity in a down market, which
is why Galinsky says companies need to exercise care before
"jumping on the CSR bandwagon."

The temptation to jump on that wagon, though, is
great, especially given the possibility of using CSR to forestall
vigorous government regulation. Even better, if companies
can get out in front of regulation and actually help shape
it, this may result in competitive advantage, Weber says.
In effect, the company "gives" the government something to
regulate in the hope that other elements central to the firm's
operation will remain unregulated. "From the company's viewpoint,
it's a bit of an agenda-setting advantage," he says. This
is especially valuable if the company can set an agenda that
creates hurdles for rivals.

Galinsky sees
CSR as one element in a landscape that also includes regulatory
oversight. "I'm a huge proponent of free markets and competition,"he
says. "Competition is one of the best ways to produce more
efficient outcomes. At the same time, regulations can really
make a huge difference by preventing certain practices that,
without regulation, would just be economically foolish not
to engage in."

The trick, he says, is creating regulation that encourages
good behavior without handcuffing competition and innovation.

"I sometimes
use the term 'locks for honest people' — ways that make
it harder for people to do the wrong thing but easier to do
the right thing," Galinsky says.